Tuesday, June 06, 2017

The UK has suffered the biggest drop in average real wages of any OECD country except depression-wracked Greece, according to the London School of Economics. Average wages for British workers, when adjusted for inflation, fell by more than 5 per cent between 2007 and 2015. Real wages in the UK began to grow again in 2015 and 2016 as inflation fell to below zero. But the spike in consumer prices in recent months, owing to the slump in the value of Sterling in the wake of last June's Brexit vote, means that real wages in the UK are now falling again. Consumer price inflation jumped to 2.7 per cent in April, its highest since 2013.Nominal average wage increases remain well below the pre-financial crisis rates of around 4 per cent a year, with the latest figures from the Office for National Statistics showing total annual pay growth of just 2.4 per cent. Most economists suspect that companies are unlikely to offer wage settlements higher than absolutely necessary to retain staff when faced with the deep uncertainty over future trade created by Brexit.

In a separate LSE's Centre for Economic Performance (CEP) report, Costa and Machin, along with David Blanchflower, argue that "the future prospects for real wage growth do not look good". The Bank of England projected a pick-up in average wage growth of 3.5 per cent in 2018 and 3.75 per cent in 2019. But the CEP authors dismiss this as "much too optimistic", pointing out that the Bank has been forecasting a similar bounce back in nominal wage growth since 2013 and it has not materialised.

The CEP report also emphasises that it is the wages of young workers aged 18-21 who have suffered the most since the financial crisis, with their real weekly wages down 16 per cent between 2008 and 2016.